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Commonwealth Equity Services, LLC v. The Ohio National Life Insurance Co.

United States District Court, D. Massachusetts

April 3, 2019



          Denise J. Casper United States District Judge.

         I. Introduction

         Plaintiffs Commonwealth Equity Services, LLC (“Commonwealth Equity”) and Margaret Benison (“Benison”) (collectively, “Plaintiffs”) filed this lawsuit against Defendants the Ohio National Life Insurance Company (“ONLIC”), Ohio National Life Assurance Corporation (“ONLAC”) and Ohio National Equities, Inc. (“ON Equities”) (collectively, “Defendants”), alleging breach of contract (Count II), breach of the implied covenant of good faith and fair dealing (Count III), fraud (Count IV), tortious interference with contractual and business relations (Count V), violation of Mass. Gen. L. c. 93A (Count VI) and unjust enrichment (Count VII) and seeking declaratory relief (Count I) and injunctive relief (Count VIII). D. 1. Plaintiffs have moved to compel arbitration and stay this proceeding pursuant to Financial Industry Regulatory Authority (“FINRA”) Rule 13200(a) and/or the arbitration agreement contained in the Selling Agreement. D. 21. For the reasons discussed below, Plaintiffs' motion to compel arbitration, D. 21, is ALLOWED.

         II. Standard of Review

         When ruling on a motion to compel arbitration, courts should “draw [upon] the relevant facts from the operative complaint and the documents submitted to the [Court] in support of the motion to compel arbitration.” Cullinane v. Uber Techs., Inc., 893 F.3d 53, 55 (1st Cir. 2018). Courts have consistently applied a summary judgment standard to these types of motions. See Johnson & Johnson Int'l v. P.R. Hosp. Supply, Inc., 258 F.Supp.3d 255, 259 (D.P.R. 2017) (applying the summary judgment standard to a motion to compel arbitration where parties had “relied extensively upon exhibits filed in the record outside of the complaint”); Pelletier v. Yellow Transp., Inc., 503 F.Supp.2d 397, 399 (D. Me. 2007) (citing cases). Accordingly, on a motion to compel arbitration, the Court “considers] facts in the light most favorable to the [non-movant] . . . and exercise[s] its ‘wide discretion' to look beyond the complaint at pleadings and documents submitted by either party.” Boulet v. Bangor Sec. Inc., 324 F.Supp.2d 120, 123-24 (D. Me. 2004) (quoting Anderson v. Delta Funding Corp., 316 F.Supp.2d 554, 558 (N.D. Ohio 2004)); see Aliments Krispy Kernels, Inc. v. Nichols Farms, 851 F.3d 283, 288-89 (3d Cir. 2017); Proulx v. Brookdale Living Cmtys. Inc., 88 F.Supp.3d 27, 29 (D.R.I. 2015).

         III. Factual Background

         The following facts are undisputed unless otherwise indicated.

         A. The Parties

         Plaintiff Commonwealth Equity is a Massachusetts limited liability company and independent broker dealer registered with FINRA, as well as an investment advisor firm registered with the United States Securities and Exchange Commission (“SEC”). D. 1 ¶ 26. Commonwealth Equity offers investment and advisory products and services directly to retail customers through agents and brokers who are licensed and registered with FINRA, the SEC and state insurance agencies. D. 1 ¶ 48. Commonwealth Equity supervises and processes the investment business of financial professionals who affiliate themselves with Commonwealth Equity. D. 1 ¶ 49. These professionals are known as representatives. Id. Plaintiff Benison has been a FINRA registered representative of Commonwealth Equity since 1998. D. 1 ¶ 27.

         Defendants ONLIC and ONLAC are insurance companies that, among other things, sell insurance-related products, including life insurance. D. 23 at 4; D. 23-2 ¶ 5. Defendant ON Equities is a wholly owned subsidiary of ONLIC, D. 1 ¶ 30; D. 4 ¶ 30, and is registered with FINRA, D. 23-2 ¶ 9. Neither ONLIC nor ONLAC is a member of FINRA. D. 23-2 ¶ 5.

         B. The Selling Agreement

         In June 1998, Defendants entered into an agreement (the “Selling Agreement”) with Commonwealth Equity, pursuant to which Commonwealth Equity-through its representatives- agreed to sell Defendants' contracts. D. 1-1. These “contracts” are securities, including variable annuities. D. 22 at 3; see D. 1-7. Commonwealth Equity representatives who sold the contracts, such as Benison, were classified as independent contractors of Defendants. D. 1-1 ¶ 16. The Selling Agreement explicitly references representatives in its introduction and in seven of the contract's twenty-four numbered sections, see D. 1-1 ¶¶ 4, 5, 7, 9, 16, 17, 23, but no representatives were signatories to the Selling Agreement.

         Each sale of a contract by Commonwealth Equity and its representatives included a customer premium, to be paid as a commission. The Selling Agreement outlined a procedure for the distribution of those commissions and provided they would be paid according to a separate “Commission Schedule.” D. 1-1 ¶ 9. According to the Commission Schedule, ONLIC would pay ON Equities a small percentage of each purchase payment and ON Equities would in turn pay Commonwealth Equity. D. 1-7 at 45. Commonwealth Equity then paid its representatives directly. D. 22 at 4; D. 1-1 ¶ 9. Thomas DeGaetano, Vice President of Annuity Product Management with ONLIC, attests that the individual variable annuities at issue in this case were sold by ONLIC and not ON Equities. D. 23-2 ¶ 9. He further attests that the premiums paid for the purchase of such annuities went to ONLIC and that commissions owed to Commonwealth Equity that were based on the sale of such annuities were paid by ONLIC. Id.

         For some of Defendants' variable annuity contracts, Commonwealth Equity and its representatives could to choose to be paid in the form of a “trail commission” over the life of the contract. D. 1 ¶ 67; see D. 1-2 at 1. A trail commission is compensation based on both the premiums paid by the customer and the earnings on those premiums that is deferred by Commonwealth Equity and the representative for at least a year and that lasts until the contract is annuitized or surrendered. D. 1 ¶ 69. For example, if a representative sells a contract for a premium of $100, 000 and agrees to a one percent trail commission starting in deposit year seven, then the representative's trail compensation for that sale would be $1, 000 plus the earnings on the initial premium per year, but the representative would only begin to get paid the trail compensation seven years after the sale date of the contract. Id. The Commission Schedule provided that “[t]rail commissions [would] continue to be paid to the broker dealer of record [Commonwealth Equity] while the Selling Agreement remain[ed] in force.” D. 1-2 at 2.

         Under the Selling Agreement, Commonwealth Equity and Defendants agreed to be bound by all rules of the National Association of Securities Dealers (“NASD”). D. 1-1 ¶ 3. NASD was a predecessor entity to FINRA.

         C. The Selling Agreement Addendum

         The Selling Agreement Addendum (“Addendum”) includes an agreement signed by Commonwealth Equity and Defendants about arbitration that provides as follows:

All parties to this agreement submit and agree that all disputes between the parties of whatever nature or subject matter relating to the duties, obligations, representations, and warranties undertaken by this Agreement, and relating to this Agreement itself, whether existing on the date hereof or arising hereafter, shall be submitted to arbitration in accordance with the Code of Arbitration Procedure ...

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